Bill Granting Tax Breaks for Tribal Resorts Clears Panel

A bill that would allow wealthy Indian tribes to use millions of dollars worth of tax breaks to finance the expansion of gambling resorts was approved Wednesday by a key state Senate committee.

The controversial measure would make California the first state to extend the tax breaks to tribes seeking to build hotels, golf courses and restaurants around casinos, potentially fueling the expansion of Las Vegas-style resorts.

Supporters of the bill, who have collected hundreds of thousands of dollars in contributions from the tribes, are pushing the measure even as the Internal Revenue Service tries to stop the sale of tax-exempt bonds to finance resorts.

“I’m not quite sure why there is all this angst about allowing tribes to do exactly what cities can do,” said the bill’s sponsor, Sen. Dean Florez (D-Shafter). He said cities currently use the bonds to subsidize hotels and convention centers. “If a city and county can do it, we believe a tribe should be able to do it as well.”

Members of the Senate Revenue and Taxation Committee agreed and with little discussion voted unanimously to approve the measure, SB 995.

At issue is whether tribes can raise money by selling state-authorized tax-exempt bonds for construction projects. Such bonds are typically used by governments to pay for sewers, roads and other public improvements.

The bill would allow tribes to use them for those purposes, but Florez said it would also let investors claim the tax exemption to build amenities, such as golf courses and hotels, around their casinos.

Because investors who buy the bonds pay no income tax on the interest they earn, the bonds can be sold at discounted interest rates. The lower interest rates can save millions of dollars in the financing of large construction projects. But the exemption costs the government millions in forgone taxes.

Even before the bill has passed, one California tribe has tried it. The Cabazon tribe near Indio, with 30 adult members, worked with a county agency to secure $145 million in bonds exempt from state taxes. The agency sold the bonds and transferred the money to the tribe, which used it to build a high-rise hotel, convention center and other amenities around its Fantasy Springs Casino. The deal resulted in a roughly $25-million subsidy from the state and federal governments for the project.

The tribe had to get the support of the surrounding communities before securing the bonds. And that support didn’t come until the tribe agreed to share millions in revenue from the hotel and to address the environmental concerns of neighbors.

The bill moving through the Legislature would permit tribes to claim the tax breaks even in cases where their surrounding communities oppose the projects.

Meanwhile, the IRS is going in the other direction. It says the bonds are off-limits for resort projects, that they are for “essential government functions” only. IRS auditors declared earlier this month that the bonds used at Fantasy Springs should not have been exempt from taxes and that they will be seeking to collect from those investors.

Critics say that is reason enough to kill the bill. But they rattle off many more.

“There is no public benefit to this,” said Neil Derry, a San Bernardino city councilman. “These bonds are designed so we can afford to build projects that serve the public good. The state is giving away tax dollars to provide services. What services are the tribes providing with these projects? Residents of California should not be subsidizing this.”

Gov. Arnold Schwarzenegger has not taken a position on the current proposal.